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If I operate a franchise as a sole trader, am I liable for all debts incurred by the business?
The answer is simple: yes. As a sole trader, there is no distinction between your personal liabilities and those of your business. This personal liability is the main reason why many franchisees run their businesses through limited companies, which are considered to have a separate legal personality from the people who own them. Running a company requires more paperwork than operating as a sole trader. There is initial registration at Companies House and annual returns and other documents that must be submitted each year. Records of board meetings and resolutions must also be kept. This can take time or, if you hire someone to do this, can be costly. There is also less privacy. Your official documents, including your annual accounts, are available for anyone to view at Companies House. Companies and sole traders are also taxed in different ways. However, while running your franchise through a limited company can protect you from the debts of the business generally, this may not apply to debts to the franchisor. The franchisor is likely to ask you, as a director and principal shareholder of the company, to enter into a separate agreement under which you will guarantee the obligations of your company.
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Companies to Consider
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